Posted on 05/02/2003 7:17:10 AM PDT by theFIRMbss
Hey Modelman, I know it's crass to think this way, but do you think the SARS crisis will have any impact on my tech stocks?
Modelman: China accounts for about 10% of all personal computer sales worldwide, and most of the sector's growth. (Intel (INTC:Nasdaq - news - commentary - research - analysis) alone has said that the Pacific Rim accounts for 39% of its revenue.) That means 10%-plus of all the stuff like disk drives, memory chips, CPUs and power supplies made by U.S., European and Asian companies depends on healthy sales in that single country. Now consider that retail sales in China have plunged since severe acute respiratory syndrome has hit, as few consumers want to venture into public places such as shopping malls to buy stuff.
One source told me that the largest Chinese PC manufacturer, Legend, has reported it is at 60% of its plan for the quarter. Motherboard manufacturers say orders from China are way off. And this news comes at a time when retail sales in South Korea, another major market for PC and other electronic products, are decelerating. Even if the SARS crisis is resolved tomorrow, a month of sales in China is probably lost.
Because few stock analysts have adjusted their revenue and earnings models to adjust for the loss, it seems logical that the second quarter will be unusually challenging for the shares of companies that sell into the PC complex, such as large-caps Intel, Micron Technology (MU:NYSE - news - commentary - research - analysis), Rambus (RMBS:Nasdaq - news - commentary - research - analysis) and Integrated Circuit Systems (ICST:Nasdaq - news - commentary - research - analysis).
* Warren Buffett Bets on China -- Should You?
By William Pesek Jr.
Tokyo, April 30 (Bloomberg) -- Warren Buffett's search for cheap stocks has brought him to a surprising place: China.
A month after telling Berkshire Hathaway Inc. shareholders U.S. shares were too expensive, Buffett's company upped its stake in PetroChina Co.
It's an intriguing move for a man not known for risky foreign investments. You would think China's dodgy corporate governance, fragile financial system and questions about social stability would keep value investors like Buffett away. China's crisis with the deadly virus causing severe acute respiratory syndrome could be another cause for concern.
That hasn't stopped Berkshire Hathaway from boosting its stake in China's largest oil producer to 13.35 percent, making it the No. 3 investor in the company's traded stock. While Buffett is always reticent to explain his investments, we can surmise two things from the move. One, some of China's biggest companies are trading cheap. Two, Buffett is gaining confidence in China as a long-term investment.
The 72-year-old billionaire isn't a big fan of emerging- market investments -- unless he's getting a real bargain. One could argue PetroChina is such a stock; as of last week it was trading at 6.3 times its estimated earnings this year. Exxon Mobil Corp. and BP Plc were both trading at 17 times estimated earnings.
Buffett's Sway
The biggest question is whether Buffett is right to view Chinese companies, or China in general, as a good long-term investment. While the answer is many years away, the significance of Buffett's PetroChina stake shouldn't be lost. It will sway other investors to follow suit.
That could be a huge plus for China's economy, and investors in it. Buffett's buying and selling decisions often attract a piggyback dynamic, whereby peers do what he does. That may not have been the case in the late 1990s, when Buffett was dismissed as a dinosaur for not riding the dot-com boom. Now that he's been vindicated by the subsequent meltdown in technology shares, China could see other big investors come its way.
Buffett has a huge following in Asia. Here, he is to stock punters what Hong Kong billionaire Li Ka-shing is to entrepreneurs: a role model. Buffett's interest in China already is garnering lots of attention. PetroChina's shares on Monday enjoyed their biggest one-day gain since July 3.
Hot Destination
China may be the world's hottest destination for foreign direct investors, but institutional ones have kept clear. Last December, China opened its $500 billion stock market to overseas institutional investors. They haven't exactly broken down the doors to get in amid worries about corporate governance and regulatory issues.
By endorsing the Beijing-based PetroChina, which produces two- thirds of the country's oil and sells 80 percent of its natural gas, Buffett may spur interest in rivals such as CNOOC Ltd. and China Petroleum & Chemical Corp. as well as other China stocks.
Investors like Brook McConnell, president of South Ocean Management Ltd., which manages about $10 million, mainly in Hong Kong-listed companies, have taken note. He says he's now ``scrambling to do more research'' on PetroChina and other Chinese companies.
Could Buffett be signaling a turning point in sentiment toward China? Perhaps.
Investors Wary
While foreign investors are wary of China in the best of times, its efforts to hide its severe acute respiratory syndrome epidemic caused a global backlash and spooked markets. If Beijing won't report properly on a non-ideological public health issue like disease, investors wondered, how could they expect to get reliable information on companies and the economy?
Buffett also needs to watch China's economic foundations. Its growth comes from two sources: public spending and foreign direct investment. If Beijing stops spending or investment dries up, the economy shrinks. The rising number of bad loans at the four state- run banks raises questions about how much longer it can finance the boom. And the SARS crisis may seriously dent foreign investment.
But with the U.S. walking in place, and many believing that for all its problems, many U.S. stocks are expensive, the Buffetts of the world are looking for new buying opportunities. Japan remains in a deep funk and European growth is slowing.
China's allure is clear enough: growth exceeding 8 percent, dynamic cities, a rapidly expanding population and an emerging middle class hungry to display its new wealth. China also is the world's fastest-growing energy market -- hence the allure of PetroChina's shares. Growth in other sectors could be brisk, too.
It may not be a smooth ride for investors, given China's challenges, but Buffett may be on to something here. Last Updated: April 29, 2003 22:47 EDT
I imagine that
there must be two windows here --
Betting the short term,
which stocks rise and fall
during the impact from SARS;
and figuring out
how China will look
in the long term after SARS,
and which stocks will thrive
in whatever is
the post-SARS China climate.
(For people who play
these big money games,
this must be a really fun
time for investing...)
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